This quarterly report on Form 10-Q, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including in particularly, our expectations regarding market demands, customer requirements and the general economic environment, and future results of operations, and other statements that include words such as "may" "expect" or "believe" . These forward-looking statements involve risks and uncertainties. We caution investors that actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors identified in the section entitled "Risk Factors" in this Report, our Quarterly Report on Form 10-Q for the first quarter of fiscal 2012, our Annual Report on Form 10-K for the fiscal year ended July 3, 2011, and other filings we have made with the Securities and Exchange Commission. These risk factors, include, but are not limited to: fluctuations in demand for our products and services; a highly competitive business environment for network switching equipment; our effectiveness in controlling expenses; the possibility that we might experience delays in the development or introduction of new technology and products; customer response to our new technology and products; the timing of any recovery in the global economy; risks related to pending or future litigation; and a dependency on third parties for certain components and for the manufacturing of our products. Business Overview
We are a leading provider of network infrastructure equipment and services for enterprises, data centers, and service providers. We were incorporated in California in May 1996 and reincorporated in Delaware in March 1999. Our corporate headquarters are located in Santa Clara, California. We develop and sell network infrastructure equipment to our enterprise, data center and telecommunications service provider customers.
We conduct our sales and marketing activities on a worldwide basis through a distribution channel utilizing distributors, resellers and our field sales organization. We primarily sell our products through an ecosystem of channel partners who combine our Ethernet products with their offerings to create compelling information technology solutions for end user customers. We utilize our field sales organization to support our channel partners and to sell direct to end-user customers, including some large global accounts. Our customers include businesses, hospitals, schools, hotels, telecommunications companies and government agencies around the world.
We outsource the majority of our manufacturing and supply chain management operations as part of our strategy to maintain global manufacturing capabilities and to reduce our costs. We conduct quality assurance, manufacturing engineering, document control and test development at our main campus in Santa Clara, California. This approach enables us to reduce fixed costs and to flexibly respond to changes in market demand The market for network infrastructure equipment is highly competitive and dominated by a few large companies. The current economic climate has further driven consolidation of vendors within the Ethernet networking market and with vendors from adjacent markets, including storage, security, wireless and voice applications. We believe that the underpinning technology for all of these adjacent markets is Ethernet. As a result, independent Ethernet switch vendors are being acquired or merged with larger, adjacent market vendors to enable them to deliver complete and broad solutions. As a result, we believe that, as an independent Ethernet switch vendor, we must provide products that, when combined with the products of our large strategic partners, create compelling solutions for end user customers. Our approach is to focus on the intelligence and automation layer that spans our hardware products and that facilitates end-to-end solutions, as opposed to positioning Extreme Networks as a low-cost-vendor with point products.
We believe that continued success in our marketplace is dependent upon a variety of factors that includes, but is not limited to, our ability to design, develop and distribute new and enhanced products employing leading-edge technology. During the first quarter of fiscal 2012, we began shipping our new Summit X670, our next-generation data center top-of-rack switch. During the second quarter of fiscal 2012, we delivered our BlackDiamond BD-X data center core switch as well as the E4G Cell Site router to initial beta customers; delivered the latest version of our ExtremeXOS operating system, version 12.7, and the latest version of the Ridgeline network and service management platform.

Results of Operations
During the second quarter of fiscal 2012, we achieved the following results:
•            Net revenues of $82.8 million compared to net revenues of $85.1
             million in the second quarter of fiscal 2011.


•            Total gross margin of 56% of net revenues compared to 56% in the
             second quarter of fiscal 2011.


•            Operating income of $4.1 million compared to operating income of
             $9.1 million in the second quarter of fiscal 2011.

• Net income of $4.1 million compared to net income of $8.9 million in the second quarter of fiscal 2011.

During the six months ended January 1, 2012, we experienced the following results:

•            Net revenues of $161.7 million compared to net revenues of $169.0
             million in the first six months of fiscal 2011.


•            Total gross margin of 56% of net revenues compared to 56% in the
             first six months of fiscal 2011.


•            Operating income of $5.8 million compared to operating income of
             $11.6 million in the first six months of fiscal 2011.


•            Net income of $5.7 million compared to net income of $11.6 million
             in the first six months of fiscal 2011.


•            Cash provided by operating activities of $4.0 million for the six
             months ending January 1, 2012 compared to cash provided by operating
             activities of $9.6 million for the six months ending December 26,
             2010.


•            Cash and cash equivalents, short-term investments and marketable
             securities decreased by $0.6 million in the six months ended
             January 1, 2012 to $146.4 million from $147.0 million as of July 3,
             2011, primarily as a result of cash used in operating activities.

We operate in three regions: Americas, which includes the United States, Canada, Mexico, Central America and South America; EMEA, which includes Europe, Middle East, and Africa; and APAC which includes Asia Pacific, South Asia and Japan. Prior to the first quarter of fiscal 2012, South America was included as part of EMEA. Revenue by geographical area (as presented in the table below) for the three and six months ended December 26, 2010 has been adjusted to reflect this change. The following table presents the total net revenue geographically for the three and six months ended January 1, 2012 and December 26, 2010 (in thousands):

                                      Three Months Ended                                        Six Months Ended
                     January 1,      December 26,        $           %        January 1,     December 26,         $            %
                        2012             2010          Change      Change        2012            2010           Change      Change
Net Revenues:
Americas            $    36,801     $     30,842     $  5,959      19.3  %   $   70,246     $      62,908     $  7,338       11.7  %
Percentage of net
revenue                    44.4 %           36.2 %                                 43.4 %            37.2 %
EMEA                     32,428           37,191       (4,763 )   (12.8 )%       63,314            71,079       (7,765 )    (10.9 )%
Percentage of net
revenue                    39.2 %           43.7 %                                 39.2 %            42.1 %
APAC                     13,583           17,098       (3,515 )   (20.6 )%       28,146            34,981       (6,835 )    (19.5 )%
Percentage of net
revenue                    16.4 %           20.1 %                                 17.4 %            20.7 %
Total net revenues  $    82,812     $     85,131     $ (2,319 )    (2.7 )%   $  161,706     $     168,968     $ (7,262 )     (4.3 )%

Net Revenues
The following table presents net product and service revenues for the three and
six months ended January 1, 2012 and December 26, 2010, respectively (dollars in
thousands):

                                      Three Months Ended                                         Six Months Ended
                     January 1,      December 26,        $            %        January 1,     December 26,         $           %
                        2012             2010          Change      Change         2012            2010           Change      Change
Net Revenue:
Product             $    68,094     $     70,334     $ (2,240 )     (3.2 )%   $  131,307     $     139,547     $ (8,240 )    (5.9 )%
Percentage of net
revenue                    82.2 %           82.6 %                                  81.2 %            82.6 %
Service                  14,718           14,797          (79 )     (0.5 )%       30,399            29,421          978       3.3  %
Percentage of net
revenue                    17.8 %           17.4 %                                  18.8 %            17.4 %
Total net revenue   $    82,812     $     85,131     $ (2,319 )     (2.7 )%   $  161,706     $     168,968     $ (7,262 )    (4.3 )%

Product revenue decreased by $2.2 million, or 3% in the three months ended January 1, 2012, and decreased by $8.2 million or 6% in the six months ended January 1, 2012, compared to the corresponding periods of fiscal 2011. The decrease in product revenue was primarily caused by lower volume, particularly in the EMEA and APAC regions. In the first half of fiscal 2011, product revenue in these geographic regions included significant sales to certain large enterprise customers. We did not experience the same level of sales to this EMEA and APAC customer base in the first two quarters of fiscal 2012, partly due to the inherent long sales cycle and the sporadic timing of sales to these customers, as well as the impact of the challenging

macroeconomic environment in Europe. The decline in product sales volume in EMEA and APAC was partially offset by continuing product sales growth in the Americas region.
Service revenue was flat in the three months ended January 1, 2012, and increased by $1.0 million or 3% in the six months ended January 1, 2012, compared to the corresponding periods of fiscal 2011. The increase in service revenue in the first half of fiscal 2012 was primarily due to our continuing stable levels of service contract renewals on our increasing installed base, resulting in higher service revenue from the amortization of contracts initiated in the first six months of fiscal 2012 and in the prior fiscal year. Cost of Revenues and Gross Profit
The following table presents the gross profit on product and service revenues and the gross profit percentage of product and service revenues for the three and six months ended January 1, 2012 and December 26, 2010 (in thousands):

                                    Three Months Ended                                        Six Months Ended
                   January 1,      December 26,        $           %        January 1,      December 26,        $           %
                      2012             2010          Change      Change        2012             2010          Change      Change
Gross profit:
Product           $    37,273     $     39,441     $ (2,168 )    (5.5 )%   $    71,008     $     77,824     $ (6,816 )    (8.8 )%
Percentage of
product revenue          54.7 %           56.1 %                                  54.1 %           55.8 %
Service                 8,995            8,540          455       5.3  %        18,796           16,993        1,803      10.6  %
Percentage of
service revenue          61.1 %           57.7 %                                  61.8 %           57.8 %
Total gross
profit            $    46,268     $     47,981     $ (1,713 )    (3.6 )%   $    89,804     $     94,817     $ (5,013 )    (5.3 )%
% of Total
Revenue                  55.9 %           56.4 %                                  55.2 %           56.1 %

Cost of product revenue includes costs of raw materials, amounts paid to third-party contract manufacturers, costs related to warranty obligations, charges for excess and obsolete inventory, royalties under technology license agreements, and internal costs associated with manufacturing overhead, including management, manufacturing engineering, quality assurance, development of test plans, and document control. We outsource substantially all of our manufacturing and supply chain management operations, and we conduct quality assurance, manufacturing engineering, document control and distribution. Accordingly, a significant portion of our cost of product revenue consists of payments to our primary contract manufacturer, Alpha Networks, located in Hsinchu, Taiwan and Dongguan, China. In addition, we source our wireless product line from Motorola and resell most of the products under the Extreme Networks, Inc. brand. Product gross profit decreased by $2.2 million and product gross margin decreased to 55% from 56% in the three months ended January 1, 2012 compared to the corresponding period of fiscal 2011. In the six months ended January 1, 2012, product gross profit decreased by $6.8 million and product gross margin decreased to 54% from 56%, compared to the corresponding period of fiscal 2011. The decreases in product gross profit and gross margin were primarily due to the decrease in product revenue in the three and six months ended January 1, 2012 compared to the same periods in fiscal 2011, unfavorable profit impact from product mix shifts, and to a lesser degree, increased sales discounts. Cost of service revenue consists primarily of labor, overhead, repair and freight costs and the cost of spares used in providing support under customer service contracts. Service gross profit increased by $0.5 million and $1.8 million in the three and six months ended January 1, 2012, respectively. The increase in gross profit in the second quarter of fiscal 2012 was primarily due to favorable impact from lower labor and service product costs. The increase in gross profit in the six months ended January 1, 2012 was primarily attributable to the increase in service revenue, combined with lower labor and service inventory costs.
Service gross margin improved to 61% from 58% in the three months ended January 1, 2012, and improved to 62% from 58% in the six months ended January 1, 2012, compared to the corresponding periods of fiscal 2011. The improvement in service gross margin was primarily due to a reduction in labor costs resulting from headcount reduction and other cost-reduction measures, as well as lower costs of service inventory resulting from product mix shifts. Operating Expenses
The following table presents operating expenses and operating income (in thousands, except percentages):

                                          Three Months Ended                                                     Six Months Ended
                                                                  $            %                                                        $            %
                    January 1, 2012      December 26, 2010      Change       Change       January 1, 2012      December 26, 2010      Change       Change
Sales and
marketing         $          22,734     $          25,087     $ (2,353 )      (9.4 )%   $          44,855     $          49,993     $ (5,138 )     (10.3 )%
Research and
development                  11,082                12,028         (946 )      (7.9 )%              23,490                24,889       (1,399 )      (5.6 )%
General and
administrative                7,954                 5,963        1,991        33.4  %              14,224                12,548        1,676        13.4  %
Restructuring,
net                             437                     -          437       100.0  %               1,392                     -        1,392       100.0  %
Litigation
settlement                        -                (4,200 )      4,200      (100.0 )%                   -                (4,200 )      4,200      (100.0 )%
Total operating
expenses          $          42,207     $          38,878     $  3,329         8.6  %   $          83,961     $          83,230     $    731         0.9  %
Operating income  $           4,061     $           9,103     $ (5,042 )     (55.4 )%   $           5,843     $          11,587     $ (5,744 )     (49.6 )%

The following table highlights our operating expenses and operating income as a percentage of net revenues:

                                                       Three Months Ended                          Six Months Ended
                                             January 1, 2012      December 26, 2010     January 1, 2012      December 26, 2010
Sales and marketing                                 27.5 %                29.5  %              27.7 %               29.6  %
Research and development                            13.4 %                14.1  %              14.5 %               14.7  %
General and administrative                           9.6 %                 7.0  %               8.8 %                7.4  %
Restructuring, net                                   0.5 %                   -  %               0.9 %                  -  %
Litigation settlement                                  - %                (4.9 )%                 - %               (2.5 )%
Total operating expenses                            51.0 %                45.7  %              51.9 %               49.3  %
Operating income                                     4.9 %                10.7  %               3.6 %                6.9  %

Sales and Marketing Expenses
Sales and marketing expenses consist of salaries, commissions and related expenses for personnel engaged in marketing and sales functions, as well as trade shows and promotional expenses. Sales and marketing expenses in the three months ended January 1, 2012 decreased by $2.4 million, or 9%, compared to the corresponding period of fiscal 2011. The decrease in sales and marketing expenses was primarily due to a decrease of $1.3 million in employee-related expenses. Other significant decreases in sales and marketing expenses in the second quarter of fiscal 2012 included a decrease of $0.4 million in both commission expense and professional fees, and a decrease of $0.3 million in both travel and IT expenses.
Sales and marketing expenses for the six months ended January 1, 2012 decreased by $5.1 million, or 10%, compared to the corresponding period of fiscal 2011. The decrease in sales and marketing expenses was primarily due to a decrease of $2.4 million in employee-related expenses resulting from headcount reduction and a decrease of $0.9 million in commission expense due to the combined impact of headcount reduction and lower revenue in the first six months of fiscal 2012 compared to the same period in fiscal 2011. Other decreases in sales and marketing expenses in the six months ended January 1, 2012, primarily reflected the effects of cost-cutting measures, including a decrease of $0.7 million in both professional services and supplies expenses, and a decrease of $0.6 million in travel expenses.
Research and Development Expenses

Research and development expenses consist primarily of salaries and related personnel expenses, consultant fees and prototype expenses related to the design, development, and testing of our products. Research and development expenses for the three months ended January 1, 2012 decreased by $0.9 million, or 8%, compared to the corresponding period of fiscal 2011. The decrease in research and development expenses was primarily due to a decrease of $1.7 million in employee-related costs, partially offset by an increase of $0.7 million in engineering project expenses.
Research and development expenses for the six months ended January 1, 2012 decreased by $1.4 million, or 6%, compared to the corresponding period of fiscal 2011. The decrease in research and development expenses was primarily due to a decrease of $2.6 million in employee-related and contract labor costs resulting from headcount reduction, and a decrease of $0.6 million in supplies and equipment costs, partially offset by an increase of $1.5 million in engineering project expenses.
General and Administrative Expenses

General and administrative expenses for the three months ended January 1, 2012 increased by $2.0 million, or 33%, compared to the corresponding period of fiscal 2011. The increase in general and administrative expenses was primarily due to an increase of $1.8 million in legal expenses, largely attributable to expenses incurred in connection with the trial of a lawsuit during the second quarter and costs associated with a new lawsuit.
General and administrative expenses for the six months ended January 1, 2012 increased by $1.7 million, or 13%, compared to the corresponding period of fiscal 2011. The increase in general and administrative expenses was primarily due to increases of $1.9 million in legal expenses and $0.7 million in accounting-related services, partially offset by a net decrease of $1.3 million in employee-related expenses resulting from headcount reduction. Restructuring, Net
In fiscal 2011, we implemented restructuring plans, involving among other things, a reduction of our worldwide workforce. The associated restructuring costs primarily consisted of cash severance, termination benefits and asset impairments. During the three and six months ended January 1, 2012, we recognized additional restructuring charges of approximately $0.6 million and $1.6 million, respectively, primarily consisting of cash severance. As of January 1, 2012, we had $0.7 million of restructuring liabilities remaining, which we anticipate paying by the end of fiscal 2012. Interest Income
The change in interest income in the three and six months ended January 1, 2012, compared to the corresponding period of fiscal 2011 was insignificant. Interest Expense
The decrease in interest expense in both the three and six months ended January 1, 2012, compared to the corresponding period of fiscal 2011 was insignificant. Other Income / (Expense), Net
Other expense, net increased by approximately $0.2 million in the second quarter of fiscal 2012, and other income, net increased by $0.2 million in the six months ended January 1, 2012 compared to the corresponding periods of fiscal 2011. The changes in other income and expense primarily resulted from net realized and unrealized gains from the settlement of accounts receivable and accounts payable transactions and from the translation of certain assets and liabilities denominated in foreign currencies into U.S. dollars. Provision (Benefit) for Income Taxes
We recorded an income tax provision of $0.2 million and $0.6 million for the three months ended January 1, 2012 and December 26, 2010, respectively. We recorded an income tax provision of $0.7 million and $0.4 million for the six months ended January 1, 2012 and December 26, 2010, respectively. The income tax provision for the three months ended January 1, 2012 consisted primarily of taxes on foreign income and U.S. state income taxes, partially offset by a benefit for the release of an unrecognized tax benefit due to the expiration of statute of limitations. The income tax benefit for the three months ended December 26, 2010 consisted primarily of taxes on foreign income and U.S. state income taxes. The income tax provision for the six months ended January 1, 2012 consisted primarily of taxes on foreign income and U.S. state income taxes, partially offset by a benefit for the release of an unrecognized tax benefit due to the expiration of the statute of limitations. The income tax provision for the six months ended December 26, 2010 consisted primarily of taxes on foreign income and U.S. state income taxes, partially offset by a reversal of previously recorded deferred tax liabilities. The income tax provisions for both fiscal years were calculated based on the results of operations for the three and six month periods ended January 1, 2012 and December 26, 2010, and may not reflect the annual effective rate.
We have provided a full valuation allowance for our U.S. net deferred tax assets after assessing both negative and positive evidence when measuring the need for a valuation allowance. For the current quarter, evidence such as operating losses during the most recent three-year period was given more weight than our expectations of future profitability which are inherently uncertain. Accordingly, we believe that there is sufficient negative evidence to maintain a full valuation allowance against our U.S. federal and state net deferred tax assets. This valuation allowance will be evaluated periodically and can be reversed partially or totally if business results have sufficiently improved to support realization of our U.S. deferred tax assets. Critical Accounting Policies and Estimates Our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited

condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. On an ongoing basis, we evaluate our estimates and assumptions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. As discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended July 3, 2011, we consider the following accounting policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements:
• Share-Based Compensation

• Revenue Recognition

• Inventory Valuation

• Long Lived Assets

• Allowance for Doubtful Accounts

• Deferred Tax Valuation Allowance

• Accounting for Uncertainty in Income Taxes

• Legal Contingencies

There have been no changes to our critical accounting policies since the filing of our last Annual Report on Form 10-K.

Recently Issues Accounting Pronouncements . . .